Essentialism Investing; How Would Greg McKeown Invest?

Essentialism-The Disciplined Pursuit of Less-Applied to Investing

It’s not often that you come across a book with a revolutionary, perspective-altering theme. Essentialism by Greg McKeown is that book.

“Essentialism isn’t about getting more done in less time. It’s about getting only the right things done.” book jacket, Essentialism.

My motto from the start; set a goal, work hard, experience results, work harder, and keep going until you get the desired outcome. (Fail and get back up again and again.) I never considered the possibility that many of my efforts might not be leading to my desired outcome.

McKeown transforms the idea of “focus and goal setting”. He posits that in order to work at the highest level, on the projects that are absolutely essential, one must do less and better in every area of our lives.

The difficulty of this pursuit is; “What is essential?“. If you’re stuck figuring out what’s essential and what isn’t, McKeown offers tests to help readers separate what might be essential from what is truly essential:

“If we could be truly excellent at one thing, what would it be?”

This is a more difficult question than meets the eye. For example, I want to “teach essential, research supported investment strategies“. This sounds okay, but in truth, it’s a bit vague; teach in what venue, to whom, and how will I know if I”m succeeding?

Consider this statement of purpose by Brad Pitt (actor and social entrepreneur) for the organization he started after Hurricane Katrina called “Make it Right”. “To build 150 affordable green homes for families living in the Lower 9th Ward“. This statement is clear, succinct, and includes an attainable, measurable outcome.

Essentialism challenges one to find the core, the essence of your life, which guides your purpose and helps to drive your life direction.

As McKeown admits, this is a difficult task. I concur, as I struggle to hone the essence of my true course. He’s asking readers not for a laundry list of “ideas” of what you’re about, but an acknowledgement of your “single highest point of contribution”.

The book continues to focus by clarifying the power of saying “no” to activities and people which don’t coincide with your mission. It’s not new that if we take on too much, we’re not doing well at anything. Yet, the act of saying no violates the “social convention” of service to the tribe and fear of disregard by others. McKeown states that saying no or even thinking of declining a request makes us physically ill.

“Nonessentialists apply implicit or unspoken criteria to the decisions they make in both their personal and their professional lives.” Essentialism, page 105. (For example, if my manager asks me to do something, I must do it.)

Be a “high frequency trader” with a computer program who can make a stock trade in 7/10,000ths of a second.

Trade on insider information.

Subscribe to Bloomberg online news service ($20,000 per year) and beat out the rest of the investing community.

The individual investor can’t employ these market beating strategies. And, if you look at the long term returns of most of the professional money managers, they can’t beat the returns of an index fund investing approach even with access to expensive investing tools and databases.

The essentialism investing strategy is straightforward with clear purpose. Don’t attempt to Beat the Pros, but match the markets. You’ll be ahead of most investors.

Index Fund Investing versus Active Management

I comb the investing research, so you don’t need to.

And in this 2014 study, The Case for Index Fund Investing, by Philips, Kinniry, Schlanger, and Hirt, the popular thesis that index fund investing beats active management is once again supported in the majority of cases.

For a quick review, indexing is an investment strategy that strives to mirror the returns of a specific market index, such as the S & P 500. The study referenced above compares the performance statistics of actively managed (stock and/or bond picking by managers) mutual funds with that of comparable passive or index funds.

The study found that the low cost index funds had a greater probability of outperforming higher fee actively managed funds in spite of the fact that index funds normally underperform their respective benchmarks.

For example, 68 percent of the actively managed U.S. large-cap value equity funds underperformed their benchmarks for the 10 year period ending December 31, 2013. Although less reliable, most index fund approaches also outperformed over shorter time periods as well.

How Would Greg McKeown Invest?

Essentialism in investing would be a focused approach using a research driven efficient strategy. I expect Greg McKeown would invest using asset classes in line with his risk tolerance.

Obviously, I have no knowledge of how McKeown invests, yet extrapolating essentialism thinking into the investing arena, I can’t imagine him using any other approach. It’s elegant, efficient, and generally offers superior performance over that of active mutual funds. Additionally, an index fund investing approach requires minimal excess effort (after the initial set up) in order to achieve market matching returns.

Action Steps

1. You must read Essentialism, it will improve your wealth in life (and maybe even financial wealth as well).

2. Take time to think, play, and live. There’s more to life than work and money.

The beauty of the essentialism idea is that if you’re focused on what really matters, and judicious about eliminating the superfluous, then there’s sufficient time for play, inspiration and thought.

What is your essential purpose?

11 Comments

“And, if you look at the long term returns of most of the professional money managers, they can’t beat the returns of an index fund investing approach even with access to expensive investing tools and databases.”

Hi Barb, I don’t follow investing research as closely as you. I noticed your choice of the word ‘most’ above. Do any professional money managers consistently beat index fund returns? If so, can you name names please? Thanks!

@Kurt, There is a story about Bill Gross,(If my memory serves) of Pimco Investments.He beat his index benchmark for 10 years, and then he didn’t. The subsequent years he under performed,never to return to his prior record. The reality is that there are always a few managers who outperform. Which leads to investors buying their fund, which leads to massive amounts flowing into the fund, which leads to future under performance. If there are any managers who consistently outperform the indexes they aren’t publicizing their successes.

I had never heard of the term essentialism before but I really like it’s simplicity and succinctness. Applying these types of strategies to things that can be as complicated as investing in the stock market always interests me. It’s amazing how complicated we can make every task when there’s usually a way to focus on what’s important and ignore the rest of the noise.

This is making me think if the Pareto Principle or the 80-20 rule, have you ever heard of it? It’s basically the idea that for many events, 80% of the effects come from 20% of the causes. The economist that first observed this found that 80% of his peas came from 20% of his pods. Also, many businesses have 80% of their sales from 20% of their customers. And apparently Microsoft found that 80% of their errors came from the 20% of the most reported bugs.

The reason it made me think of this was first because I had been doing research on game theory for some of my recent posts. But I was reminded of it because essentialism sounds like a way of focusing on that 80%, this is the essential.

Once I have time to fit this book into my 80% I will definitely have to pick it up.

I love this idea of focusing on what is most important in life, and transferring it other aspects, such as investing. I agree that index funds are in line with the idea of essentialism. When building long-term wealth it makes sense to focus on the effort most likely to bring the best bang for your investment dollar, and for the long-term, it’s asset-based index investing according to your risk profile. At least I think so I think there’s a place for DRIPs as well, since you can have your payouts automatically reinvested. Get a fund or ETF that pays dividends and have them automatically reinvested, and you’ve combined a couple of great strategies that keep it simple.

@Zee, ACtually, McKeown speaks about the pareto principle quite a bit. And that is a component of essentialism. (Pareto principle is that 80% of our results come from 20% of our efforts). It’s such and elegant approach and for me, extremely difficult to implement. But I’m giving it a real shot!
@Miranda, It is fascinating how one topic “essentialism” so clearly relates to other areas. Although I’m a proponent of index fund investing, according to ones risk tolerance, I do believe there is a place for individual stocks or other approaches. I usually suggest use 10% of your investment portfolio to try other strategies, if you’re so inclined.

We humans do tend to over-complicate things, don’t we? I love the concept of essentialism, and I’ve added Greg’s book to my reading list.

As far as applying this concept to my investing, you boiled it down for me in this sentence: “The study found that the low cost index funds had a greater probability of outperforming higher fee actively managed funds in spite of the fact that index funds normally underperform their respective benchmarks.”

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